When It Comes to Rising Interest Rates, Speed Is the Key
Rising yields can be a sign of an improving economy. A stronger market could entice investors toward small-cap growth stocks and away from the conservative dividend-paying stocks that have been popular for the last five years.
I am sure the speed at which interest rates rise is going to be the deciding factor of what will happen to investors.
My personal bias is that interest rates will continue to inch their way forward returning to what I will call "historical normal levels" without much of an impact one way or the other. This should help the economy and be a boon for investors and companies.
If I am wrong, and interest rates do climb at a very fast rate, expect a headwind to slam against our economic recovery. I would expect that portfolios would suffer under such a scenario.One other cautionary note: Higher interest rates also mean companies would have to pay more if they borrowed, which would squeeze margins. For quite a while companies have been dumping excessive overhead costs to deliver acceptable earnings to their investors. High interest rates are going to challenge companies that are already running lean and don't have much more fat to burn. It is highly probable that margins will suffer. I welcome higher interest rates as the Fed tapers its quantitative easing, because I believe that in the long run it could prove healthier for investors, particularly for retirees. What we need to watch is the speed at which interest rates rise, as too quick an increase could damp economic growth. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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